Will the ECB Cut Rates in January?

As a result of the last-minute deal made to avoid the fiscal cliff in the United States, risky euro-zone bonds had a strong start to the year, supporting expectations that deposit rates will be left unchanged after Thursday’s European Central Bank meeting. Now, traders are unprepared for the possibility that the ECB may ease lending conditions this week by cutting rates, according to Reuters.

December saw expectations of a cut to the ECB’s deposit rate rise and fall as the bank contemplated an effective policy to manage the debt crisis, but current pricing indicates that traders are counting on a wait-and-see strategy from the institution this month. As Rabobank market economist Elwin de Groot told the publication, the market is no longer strongly positioned for a near-term cut in rates.

Deposit rates are so closely watched because “the refinancing rate at which the central bank lends money is the main tool used to encourage bank lending and boost the economy,” reported Reuters on Monday. “But banks are already flooded with cheap ECB loans, meaning the deposit rate charged on excess reserves has a more significant impact on short-term interbank borrowing costs.”

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